Ares Capital Corporation (ARCC) Q2 2025 Earnings Call Transcript

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Overview

The earnings call summary and Q&A session indicate a stable financial performance with positive growth in investment commitments and portfolio quality. Despite some concerns over non-accrual rates, management's confidence in navigating market conditions and maintaining strong liquidity is reassuring. The dividend stability and strong core earnings further enhance the positive outlook. Although management avoided forward guidance on some aspects, the strategic focus and market positioning suggest a positive sentiment overall.

Key Financial Performance

Core Earnings Per Share (EPS) $0.50 per share, stable compared to the prior quarter but down from $0.61 in the same period a year ago. The stability is attributed to consistent yields in the portfolio.

Net Asset Value (NAV) Per Share Increased both sequentially and year-over-year, supported by earnings in excess of dividends and robust net investment gains, including strong net realized gains from the equity co-investment portfolio.

GAAP Net Income Per Share $0.52 for Q2 2025, compared to $0.36 in the prior quarter and $0.52 in Q2 2024. The increase from the prior quarter is due to higher net realized gains on investments.

Net Realized Gains on Investments $117 million in Q2 2025, contributing to cumulative net realized gains of nearly $900 million since inception. Gains were partially offset by $44 million in capital gains taxes.

Total Portfolio at Fair Value $27.9 billion at the end of Q2 2025, up from $27.1 billion in the prior quarter and $25 billion a year ago. Growth driven by net fundings and investment activity.

Debt-to-Equity Ratio 0.98x at the end of Q2 2025, consistent with the prior quarter, indicating stable leverage.

Non-Accrual Rates Increased modestly to 2% at cost and 1.2% at fair value, but remain below historical averages and the broader BDC peer group.

Weighted Average EBITDA Growth of Portfolio Companies 13% over the last 12 months, up from 12% in the prior quarter, reflecting strong performance across industries and company sizes.

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Operating Highlights

Core Earnings: Stable core earnings of $0.50 per share, representing an annualized return on equity of 10%.

Net Asset Value: Increased both sequentially and year-over-year, supported by earnings in excess of dividends and robust net investment gains.

Market Positioning: Actively transacted during market volatility, reinforcing value proposition and gaining enhanced terms and premium economics.

Market Activity: Reviewed 20% more transactions quarter-over-quarter, with June accounting for nearly half of the quarter's activity.

Upper Market Activity: Served as lead-left arranger for the largest private credit LBO on record with the take-private of Dun & Bradstreet.

Portfolio Diversification: Portfolio diversified across 566 companies in 25 industries, with no single investment exceeding 2% of the portfolio.

Portfolio Health: Weighted average organic EBITDA growth of 13% over the last 12 months, with low leverage and strong interest coverage.

Non-Accrual Rates: Non-accrual rates remain below historical averages, with a modest uptick to 2% at cost.

Credit Facility Expansion: Upsized largest revolving credit facility by $880 million, extended maturity dates, and reduced drawn spread by 20 basis points.

Debt Issuance: Issued $750 million of long 5-year unsecured notes at a tight spread to treasuries, marking a record for BDCs.

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Risk or Challenges

Tariff-related volatility: The company faced economic uncertainty and reduced investment activity during the second quarter due to tariff-related volatility.

Policy-driven volatility: Policy-driven volatility temporarily slowed transaction activity, particularly in the liquid loan markets, during the early part of the quarter.

Non-accrual rates: Non-accrual rates increased modestly from 1.5% to 2% at cost and from 0.9% to 1.2% at fair value, though still below historical averages.

Market uncertainty: The company highlighted the need to provide certainty of capital to potential borrowers in the face of market uncertainty.

Tariff and policy risks: The portfolio is focused on domestic, service-oriented businesses to mitigate risks from tariffs and other government policies, but these remain potential challenges.

Reduced M&A volume: Overall declines in middle market M&A and transaction activity were noted, though the company is reviewing more opportunities.

Credit performance risks: The company is monitoring potential impacts from changing domestic and foreign policies, geopolitical shifts, and other risks on its portfolio.

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Guidance & Outlook

Market Activity and Investment Opportunities: The company anticipates a potentially more active second half of the year, supported by a growing number of reviewed opportunities, which increased by 20% quarter-over-quarter. June accounted for nearly half of the quarter's transaction activity, indicating momentum for future investments.

Large-Scale Transactions: Ares Capital Corporation will serve as the lead-left arranger for the largest private credit LBO on record with the take-private of Dun & Bradstreet, expected to close in the third quarter. This transaction highlights the company's ability to provide significant capital to larger borrowers.

Portfolio Performance and Growth: The company expects continued healthy performance from its portfolio, with borrowers' weighted average organic EBITDA growth rates accelerating into double digits over the last 12 months. Borrower leverage levels remain below the 5-year average, and the portfolio's average loan-to-value ratio is in the low 40% range.

Dividend Stability and Spillover Income: The company declared a third-quarter dividend of $0.48 per share, supported by core earnings exceeding the dividend and significant undistributed spillover income. The company estimates $878 million, or $1.29 per share, available for distribution to stockholders in 2025.

Transaction Activity Recovery: Transaction activity is recovering to pre-tariff levels in the third quarter, with total commitments for the quarter to date at $1.1 billion and a backlog of $2.6 billion as of July 24, 2025. This recovery is expected to support future investment volumes.

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Shareholder Return Plan

Dividend Stability: Ares Capital Corporation declared a third quarter 2025 dividend of $0.48 per share, payable on September 30 to stockholders of record on September 15. This marks the 16th consecutive year of stable or increasing regular dividends.

Dividend Coverage: Core earnings per share of $0.50 in the second quarter exceeded the declared dividend of $0.48 per share, indicating strong dividend coverage.

Spillover Income: The company has an estimated $878 million, or $1.29 per share, of spillover income available for distribution in 2025, providing further stability for future dividends.

Share Repurchase Program: No share repurchase program was discussed or mentioned in the transcript.

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Key Q&A

Q:Can you talk about any improvement in terms of spreads and upfront fees and how might that drive an NOI improvement on the go forward?

A:Management noted stability in overall spreads and terms, with some intra-quarter volatility. Spreads tightened back to previous levels by the end of the quarter. They highlighted stability in spreads over the last 3-4 quarters and mentioned that volume picked up significantly in June, with strong commitments post quarter-end.

Q:Can you discuss the ability or likelihood to expand off-balance sheet vehicles like SDLP and Ivy Hill back to historical averages or peaks?

A:Management stated that both vehicles are strategically important and expressed that they wouldn’t be surprised if they grow more from here.

Q:How are you weighing the balance between taking leverage up versus issuing new equity off of the ATM?

A:Management emphasized the balance between raising capital via the ATM program and maintaining leverage. They raised $300 million via the ATM this quarter, compared to $400-$500 million in prior quarters. They noted that operating around 1x leverage provides financial flexibility and stability, covering the dividend well.

Q:Is it getting harder to restructure a club asset correctly the first time, given the reappearance of some restructured names on non-accrual?

A:Management acknowledged the unusual reappearance of some restructured names on non-accrual but attributed it to idiosyncratic factors rather than systemic issues. They emphasized that non-accrual levels remain low and below historical and industry averages.

Q:Was the capital injection into Ivy Hill this quarter part of a long-term growth plan or opportunistic?

A:Management clarified that the capital injection was part of a long-term growth plan and normal course of action, not opportunistic.

Q:Are you seeing activity broaden out into the core and lower middle market as well?

A:Management confirmed that activity is broadening across different company sizes. They noted a shift back to the lower middle market in 2024, with average EBITDA of new borrowers coming down, indicating broad-based momentum.

Q:Why is leverage at a lower level compared to peers, and what would give you confidence to raise it?

A:Management stated that operating at the lower end of their leverage range (0.9%-1.25%) provides flexibility to capitalize on market opportunities. They are not managing specifically to this level but appreciate the flexibility it offers.

Q:Would a real increase in deal activity help push spreads to more attractive levels?

A:Management suggested that increased deal flow could modestly widen spreads due to supply and demand dynamics. However, they are satisfied with current total yields, which are historically strong.

Q:Was the increase in dividend income this quarter driven by recurring or nonrecurring factors?

A:Management explained that the increase was a mix of recurring and nonrecurring factors, with approximately $10 million attributed to nonrecurring dividends from equity co-investments.

Q:How do the relative pricing and returns for smaller-scale or core middle market segments compare to the upper market?

A:Management noted that smaller companies generally have lower leverage levels and wider spreads, with incremental yields of 50 basis points or more compared to larger companies.

Q:Are equity co-investment exits driven by Ares Capital or sponsors, and is there visibility into future realizations?

A:Management stated that exits are primarily driven by sponsors and are sporadic. They did not provide forward-looking guidance on future realizations.

Q:Are you still estimating a mid-single-digit exposure to companies impacted by tariffs?

A:Management revised their estimate, stating that high-risk names now represent a low single-digit percentage of the portfolio, down from mid-single digits last quarter. They noted that portfolio companies are mitigating tariffs through pricing actions and other measures.

Q:Will there be a long-term shift in Ivy Hill’s target asset classes to balance growth targets?

A:Management confirmed that Ivy Hill will continue its first lien investment strategy with no anticipated strategic changes.

Q:Review of Unclear Management Responses

A:Management avoided providing forward-looking guidance on equity co-investment realizations, citing lack of control and the sporadic nature of such events.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

ARCC Transcript

Ares Capital (ARCC) Q3 2025 Earnings Call Transcript

Positive10-28

The earnings call summary and Q&A indicate a positive outlook for Ares Capital Corporation. The company anticipates increased market activity and investment opportunities, strong portfolio performance, and dividend stability. The Q&A session revealed no significant risks, with management displaying confidence in their strategies. The positive sentiment is further supported by the company's involvement in large-scale transactions and the recovery of transaction activity. Despite some vague responses, the overall sentiment remains positive, suggesting a likely stock price increase in the short term.

Ares Capital Corporation (ARCC) Q2 2025 Earnings Call Transcript

Positive7-29

Ares Capital Corporation (NASDAQ:ARCC) Q1 2025 Earnings Call Transcript

Unknown4-30

The earnings call presents a mixed picture: while there are positive elements such as a stable dividend and increased investment activity, the decline in core EPS and GAAP net income raises concerns. The Q&A section highlights management's confidence in navigating volatility and minimal exposure to tariffs, but the lack of clear guidance on potential risks tempers optimism. The absence of a share repurchase program and the stable dividend signal a cautious approach. Overall, the sentiment is balanced, leading to a neutral prediction for the stock price movement.

Earnings call transcript: Ares Capital Q1 2025 sees stable dividends, market volatility

Unknown4-29

The earnings call presents mixed signals. Financial performance shows declines in core EPS and net income, but there is growth in gross commitments and total portfolio value. The company maintains strong liquidity and a stable dividend, but lacks a share repurchase program. The Q&A reveals minimal exposure to tariffs and a strong dividend outlook, yet management's unclear responses on certain risks raise concerns. Overall, these factors suggest a neutral sentiment, with no strong catalysts for significant stock price movement in the short term.

ARCC Report

ARES CAPITAL CORP 10-K

10-K

2025-02-05

ARES CAPITAL CORP 10-Q

10-Q

2024-10-30

ARES CAPITAL CORP 10-Q

10-Q

2024-07-30

ARES CAPITAL CORP 10-Q

10-Q

2024-05-01

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